Dollar slump drives emerging markets, gold ETFs

Hot money chases precious metals, commodities, other currency hedges

By

JohnSpence

BOSTON (MarketWatch) — Activity in exchange-traded funds that target emerging markets, precious metals and commodities is ramping up as investors seek ways to protect their portfolios from a sagging U.S. dollar.

The iShares Silver Trust
SLV, -0.55%
nearly set a volume record Thursday as more than 30 million shares traded and the ETF fell 3% for the session. Yet the silver ETF erased the loss on Friday following a disappointing September employment report, capping a volatile week in precious metals.

“As the Federal Reserve appears poised to implement further quantitative easing, the likelihood of additional capital injections that could increase the money supply further has enhanced the appeal of precious metals,” said Michael Johnston, senior analyst at ETF Database.

SPDR Gold Shares
GLD, -0.23%
also saw volume spike during Thursday’s metals meltdown, a reminder that speculative money can move in both directions, and quickly. Through the end of September, the gold ETF posted net cash inflows of $6.8 billion so far this year, bringing total assets to around $55 billion, according to National Stock Exchange data.

Front line of the ‘currency war’

Many investors are “concerned that the probable escalation of quantitative easing and potential ‘currency wars’ will lead to a marked devaluation of paper assets,” said J.P. Morgan in an Oct. 7 research note.

“This unease is delivering a significant source of new demand for hard assets, such as commodities,” J.P. Morgan said. “Metals, and gold and silver in particular, are the obvious beneficiaries in a period of hard asset enthusiasm because they are not perishable, easily storable and have a long history of being an established store of value and unit of exchange.”

SPDR Gold Shares is up more than 20% so far in 2010, while iShares Silver Trust has vaulted nearly 40%. Several other exchange-traded funds and notes track indexes linked to precious metals, base metals and miner stocks.

In another sign of rising inflation expectations, agriculture and soft-commodities ETFs have started October with a fierce rally. For example, iPath Dow Jones-UBS Grains Subindex Total Return
JJG, -1.24%
jumped more than 10% last week. Cheap money is likely providing fuel to commodities.

Among diversified commodity ETFs, PowerShares DB Commodity Index Tracking Fund
DBC, +0.19%
is the largest with about $4.4 billion in assets. It has marched steadily higher since late August while the dollar has been routed.

PowerShares DB US Dollar Bullish Fund
UUP, +0.89%
has fallen sharply the past few weeks but is approaching multiyear resistance at $22 a share. Therefore, it may due for a bounce, which could be more violent than expected with so many negative on the dollar.

Its mirror image, PowerShares DB US Dollar Bearish Fund
UDN, -0.95%
, has profited from the greenback’s weakness, along with foreign-currency ETFs such as CurrencyShares Euro Trust
FXE, -1.41%

Investors embrace emerging markets

Investors have also been stuffing cash into emerging markets ETFs that stand to benefit from strength in commodity prices. Interest rates in many developed countries are near zero, while some emerging economies are offering better yields and growth.

Vanguard Emerging Markets ETF
VWO, +0.46%
and iShares MSCI Emerging Markets Index Fund
EEM, +0.44%
are among the five largest ETFs. They have raked in $13.3 billion and $2.8 billion, respectively, this year through September, with investors clearly preferring the lower-fee Vanguard ETF.

IMF aims to rebalance global economy

(1:22)

Anoop Singh, Asia and Pacific Department Director for the IMF, explains the IMF's objective, and the role currencies play in correcting imbalances in global trade deficits.

“With the value of the U.S. dollar slumping to multiyear lows versus other major currencies, flows into emerging markets assets and commodities accelerated sharply in early October,” investment researcher EPFR Global said in an Oct. 7 report. The firm also noted strong interest in Latin American funds, particularly Brazil.

The iShares MSCI Brazil Index Fund
EWZ, -0.81%
has rallied more than 10% over the past month. With more than $11 billion in assets, it is one of the largest international-stock ETFs. Last week, the Brazil ETF failed in its attempt to break through $80 a share, which has acted as a ceiling throughout the past year.

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